FASB ASC 606, Revenue for Contracts with Customers, has broad changes for how many industries will account for their revenues in their financial statements. Insurance entities were largely scoped out of these new pronouncements. In fact, the Financial Accounting Standards Board (FASB) issued clarifying guidance, FASB ASU 2016-20, stating that all contracts within the scope of FASB ASC 944, such as investment contracts, life and health insurance, property and liability insurance, title insurance and mortgage guarantee insurance, are excluded from the scope of FASB ASC 606.
Contracts within the scope of FASB ASC 944 are excluded from the scope of Topic 606. That exception applies to contracts within the scope of Topic 944 and does not apply to all contracts of insurance entities. An insurance entity might need to consider whether a contract with a customer is for goods or services that are not within the scope of Topic 944; for example, a contract for administrative services (such as claims processing) without any insurance element is at present accounted for as a revenue arrangement within the scope of Topic 605. The FASB expects that those types of service arrangements would be accounted for under Topic 606.
However, contract fulfillment activities would not be within the scope of Topic 606. These activities would be considered part of the contract within the scope of Topic 944. This assessment is similar to how an insurance entity determines whether elements of a contract are within the scope of Topic 944 or Topic 605 today.
The following are examples of activities performed by an insurance entity, included in contracts within the scope of FASB ASC 944, that the Financial Reporting Executive Committee (FinREC) believes generally should be considered fulfillment activities (that either mitigate risks to the insurer or contain costs related to services to fulfill the insurer’s obligation). They should not be considered within the scope of FASB ASC 606, but should be considered part of the contract within the scope of FASB ASC 944:
GAAP reporters should have a clear understanding of how their contracts with customers are structured to apply this new guidance correctly.
If you have questions about applying the new revenue recognition standards for your insurance entity, contact our audit experts.
